Will Scotland have to join the euro?



Scottish euro coin
Originally uploaded by viralbus

The unionists seem to be in a tizzy about the prospect that Scotland will be forced to join the euro, so let's have a rational look at the most likely scenarios.

To start with, it's entirely possible (perhaps even likely) that Scotland will be allowed to inherit the UK's opt-out. In that case, Scotland will have a formal right to remain outwith the euro indefinitely.

However, what happens if Scotland has to let go of the opt-out as part of the renegotiation of the membership terms? It's not like Scotland would have to introduce the euro at once. Before any member state can introduce the euro, the convergence criteria have to be fulfilled:

  1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing member states of the EU.
  2. Government finance:
    1. Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.
    2. Government debt:The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.
  3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.
  4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

Currently the UK doesn't pass any of the tests apart from the last one, and as far as I can tell, the same would apply to Scotland at the moment. Therefore, Scotland wouldn't be allowed to join the euro at first, even if the people of Scotland so desired.

It is of course possible (and probably also desirable) that Scotland will fulfil (1) and (2) in the longer term, but criterion (3) requires a deliberate step that Scotland can decide not to take.

This is how the Swedes have managed not to join the euro -- they're technically obliged to join the euro, but they have chosen not to join ERM II, which means that they cannot join. Scotland can do the same, even if it's against the spirit of the treaties.

Finally, by the time the Scottish economy qualifies to join the euro, the European Union and the euro might have changed beyond recognition, and it is entirely possible that there will be a strong desire to join the euro by then.

It's definitely not anything to worry about at this stage.

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